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We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy? L

We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy? L

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Suppose that the current YTM is 8% and assume semi-annual compounding. We have a liability to pay $10,000 in 7 years. In order to construct a hedged portfolio, we can use the bonds as follows: Bond Maturity (year) Coupon rate Par value YTM (%) ($) (%) A 3 Compounding frequency 6 100 8 24 Be 6 80 100 8 2 Ce 10 40 100 8 20 ㄎ Liability A 3 7 0 10000 8 24 We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy?< t ← Moreover, suppose that yields suddenly drop from 8% to 7%. Construct a table to check the performance of immunization.
Transcribed Image Text:Suppose that the current YTM is 8% and assume semi-annual compounding. We have a liability to pay $10,000 in 7 years. In order to construct a hedged portfolio, we can use the bonds as follows: Bond Maturity (year) Coupon rate Par value YTM (%) ($) (%) A 3 Compounding frequency 6 100 8 24 Be 6 80 100 8 2 Ce 10 40 100 8 20 ㄎ Liability A 3 7 0 10000 8 24 We want to construct an asset portfolio by purchasing bond A, B, and C in a way that the values, durations, and convexity measures of the asset portfolio match those of the liability (immunization). How many bonds do we need to buy?< t ← Moreover, suppose that yields suddenly drop from 8% to 7%. Construct a table to check the performance of immunization.
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